1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCCOUNTING POLICIES

    The accompanying financial information has been prepared by Aehr Test Systems, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations.

    In the opinion of management, the unaudited condensed consolidated financial statements for the interim periods presented have been prepared on a basis consistent with the May 31, 20182019 audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial position and results of operations as of and for such periods indicated. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2018.2019. Results for the interim periods presented herein are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year.

    PRINCIPLES OF CONSOLIDATION. The condensed consolidated financial statements include the accounts of Aehr Test Systems and its subsidiaries (collectively, the "Company"). All significant intercompany balances have been eliminated in consolidation. For the Company’s majority owned subsidiary, Aehr Test Systems Japan K.K., the noncontrolling interest of the portion the Company does not own was reflected on the Condensed Consolidated Balance Sheets in Shareholders’ Equity and in the Condensed Consolidated Statements of Operations.

    ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for sales and revenue allowances, the allowance for doubtful accounts, inventory valuations, income taxes, stock-based compensation expenses, and product warranties, among others. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ materially from those estimates.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted

    In January 2016, the FASB issued an accounting standard update related to the recognition and measurement of financial assets and financial liabilities. This standard changes accounting for equity investments and financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, itthis standard clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ThisThe Company adopted this new standard is effective for us in fiscal year 2020. EarlyThe adoption is permitted. The Company does not expect a material impact of this new guidancestandard did not have a significant impact on itsthe Company’s consolidated financial statements.

    In June 2016, the FASB issued an accounting standard update (“ASU”) that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. TheDue to a subsequent ASU in November 2019, the accounting standard update will be effective for the Company beginning in the first quarter of fiscal 20212024 on a modified retrospective basis, and early adoption in fiscal 2020 is permitted. The Company does not expect a material impact of this accounting standard update on its consolidated financial statements.

 

3. REVENUE

    The Company recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by following a five-step process,process: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price, and (5) recognize revenue when or as the Company satisfies a performance obligation, as further described below.

    Performance obligations include sales of systems, contactors, spare parts, and services, as well as installation and training services included in customer contracts.

    A contract’s transaction price is allocated to each distinct performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company generally does not grant return privileges, except for defective products during the warranty period.

    For contracts that contain multiple performance obligations, the Company allocates the transaction price to the performance obligations on a relative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to historical discounting trends for products and services and pricing practices in different geographies.

    Revenue for systems and spares are recognized at a point in time, which is generally upon shipment or delivery. Revenue from services is recognized over time as services are completed or ratably over the contractual period of generally one year or less.

    The Company has elected the practical expedient under ASC 606 to not assess whether a contract has a significant financing component as the Company’s standard payment terms are less than one year.

    The following tables show revenues by major product categories. Within each product category, contract terms, conditions and economic factors affecting the nature, amount, timing and uncertainty around revenue recognition and cash flow are substantially similar.

The Company’s revenues by product category are as follows (in thousands):

    The following presents information about the Company’s operations in different geographic areas. Net sales are based upon ship-to location (in thousands):

    With the exception of the amount of service contracts and extended warranties, the Company’s product category revenues are recognized at the point in time when control transfers to customers.

 

    A receivable is recognized in the period the Company delivers goods or provides services or when the Company’s right to consideration is unconditional. The Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a contract asset.

    Contract liabilities include payments received in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period as a component of deferred revenue. Contract liabilities as of February 28,November 30, 2019 and May 31, 20182019 were $1,507,000$1,873,000 and $2,089,000,$1,734,000, respectively. During the three and ninesix months ended February 28,November 30, 2019, the Company recognized $185,000$132,000 and $1,179,000,$1,181,000, respectively, of revenues that were included in contract liabilities as of May 31, 2018.2019.

    On February 28,November 30, 2019, the Company had $833,000$415,000 of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. The Company expects to recognize approximately 18%50% of its remaining performance obligations as revenue in fiscal 2019,2020, and an additional 82%50% in fiscal 20202021 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.

    The Company generally expenses sales commissions when incurred as a component of selling, general and administrative expense as the amortization period is typically less than one year. Additionally, the majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory and fixed assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective manufacturing process.

4. EARNINGS PER SHARE

    Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, RSUs and ESPP shares) outstanding during the period using the treasury stock method.

    The following table presents the computation of basic and diluted net (loss) income per share attributable to Aehr Test Systems common shareholders (in thousands, except per share data):

    For the purpose of computing diluted earnings per share, the weighted average number of potential common shares does not include stock options with an exercise price greater than the average fair value of the Company’s common stock for the period, as the effect would be anti-dilutive.antidilutive. Stock options to purchase 2,919,000 shares of common stock were outstanding as of November 30, 2019, but were not included in the computation of diluted net income per share, because the inclusion of such shares would be antidilutive. In the three and nine months ended February 28,November 30, 2018 and six months ended November 30, 2019 and 2018, potential common shares havewere not been included in the calculation of diluted net loss per share as the effect would be anti-dilutive.antidilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for these periods are the same. Stock options to purchase 3,220,0003,373,000 shares of common stock, RSUs for 34,00038,000 shares and ESPP rights to purchase 327,000 ESPP shares were outstanding as of February 28, 2019,November 30, 2018, but were not included in the computation of diluted net loss per share because the inclusion of such shares would be anti-dilutive. Stock options to purchase 983,000antidilutive. The 2,657,000 shares of common stock wereconvertible under the 9% Convertible Secured Notes (the “Convertible Notes”) outstanding as of February 28,at November 30, 2018 but were not included in the computation of diluted net incomeloss per share because the inclusion of such shares would be anti-dilutive. The 2,657,000 shares convertible under the convertible notes outstanding at February 28, 2019 and 2018 were not included in the computation of diluted net income (loss) per share, because the inclusion of such shares would be anti-dilutive.antidilutive.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The Company’s financial instruments are measured at fair value consistent with authoritative guidance. This authoritative guidance defines fair value, establishes a framework for using fair value to measure assets and liabilities, and disclosures required related to fair value measurements.

    The guidance establishes a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1 - instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

Level 2 - instrument valuations are obtained from readily-available pricing sources for comparable instruments.

Level 3 - instrument valuations are obtained without observable market values and require a high level of judgment to determine the fair value.

    The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of May 31, 20182019 (in thousands):

    Included in Money market funds as of February 28,November 30, 2019 and May 31, 20182019 is $80,000 restricted cash representing a security deposit for Letter of Credit.the Company’s United States manufacturing and office space lease.

    There were no financial liabilities measured at fair value as of February 28,November 30, 2019 and May 31, 2018.2019.

    There were no transfers between Level 1 and Level 2 fair value measurements during the three and ninesix months ended February 28,November 30, 2019.

    The carrying amounts of financial instruments including cash, cash equivalents, receivables, accounts payable and certain other accrued liabilities, approximate fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the carrying value of the debt approximates the fair value.

6. ACCOUNTS RECEIVABLE, NET

Accounts receivable represent customer trade receivablesreceivables. As of November 30, 2019 and is presented net of allowanceMay 31, 2019, there were no allowances for doubtful accounts of $0 at February 28, 2019 and $4,000 at May 31, 2018.accounts. Accounts receivable are derived from the sale of products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies. The Company’s allowance for doubtful accounts is based upon historical experience and review of trade receivables by aging category to identify specific customers with known disputes or collection issues. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.

    Inventories are comprised of the following (in thousands):

8. PRODUCT WARRANTIES

    The Company provides for the estimated cost of product warranties at the time revenues are recognized on the products shipped. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company’s estimates, revisions to the estimated warranty liability would be required.

    The standard warranty period is one year for systems and ninety days for parts and service.

    The following is a summary of changes in the Company's liability for product warranties during the three and ninesix months ended February 28,November 30, 2019 and 2018 (in thousands):

    The accrued warranty balance is included in accrued expenses on the accompanying condensed consolidated balance sheets.

9. CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM

    Customer deposits and deferred revenue, short-term (in thousands):

10. INCOME TAXES

    Income taxes have been provided using the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and net operating loss and tax credit carryforwards measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse or the carryforwards are utilized. Valuation allowances are established when it is determined that it is more likely than not that such assets will not be realized.

    Since fiscal 2009, a full valuation allowance was established against all deferred tax assets as management determined that it is more likely than not that certain deferred tax assets will not be realized.

    The Company accounts for uncertain tax positions consistent with authoritative guidance. The guidance prescribes a “more likely than not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not expect any material change in its unrecognized tax benefits over the next twelve months. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income taxes.

    The Company has only operating leases for real estate including corporate offices, warehouse space and certain equipment. A lease with an initial term of 12 months or less is generally not recorded on the U.S. government enacted comprehensive tax legislation commonly referredcondensed consolidated balance sheet, unless the arrangement includes an option to aspurchase the Tax Cutsunderlying asset, or renew the arrangement that the Company is reasonably certain to exercise (short-term leases). The Company recognizes lease expense on a straight-line basis over the lease term for short-term leases that the Company does not record on its balance sheet. The Company’s operating leases have remaining lease terms of 1 to 4 years.

    The Company determines whether an arrangement is or contains a lease based on the unique facts and Jobs Act (the “Tax Act”). On December 22, 2017,circumstances present at the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effectsinception of the Tax Act. SAB 118 provides a measurement period that shouldarrangement. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.readily determinable.

    As part ofsuch, the transitionCompany utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the new territorial tax system, the Tax Act imposeslease payments in a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. The company is not subjectsimilar economic environment. Certain adjustments to the transition tax. The one-time transition tax is based on post-1986 earnings and profits that were previously deferred from U.S. income tax. The Company has finalized its calculation of the total post-1986 earnings and profitsright-of-use asset may be required for its foreign corporations. Based on the Company’s net operating loss carryovers and valuation allowance, there is no impact to its consolidated financial statementsitems such as a result of the completion of the analysis.initial direct costs paid or incentives received.

    The new law effective December 31, 2017 repeals the corporate alternative minimum tax, or AMT, regime and permits existing minimum tax credits to offset the regular tax liability for any tax year. Further, the credit is refundable for any tax year beginning after December 31, 2017 and before December 31, 2020 in an amount equal to 50% of the excess of the minimum tax credit over the allowable creditweighted-average remaining lease term for the year againstCompany’s operating leases was 3.7 years at November 30, 2019 and the regular tax liability. Any unused minimum tax credit carryforward is refundable in the following year. As result, the company recorded a benefit of $90,000 in the third quarter of fiscal 2018 for its Federal refundable AMT credit.

    The Company’s obligations underoperating lease cost was $183,000 and $366,000 for the Purchase Agreement are secured by substantially all of the assets of the Company.

    Changes inThe following table presents supplemental cash flow information related to the components of AOCI, net of tax, were as followsCompany’s operating leases (in thousands):

 

12. STOCK-BASED COMPENSATION

    Stock-based compensation expense consists of expenses for stock options, restricted stock units, or RSUs, and employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation expense for stock options and ESPP purchase rights is measured at each grant date, based on the fair value of the award using the Black-Scholes option valuation model, and is recognized as expense over the employee’s requisite service period. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different from those of publicly traded options. For RSUs, stock-based compensation cost is based on the fair value of the Company’s common stock at the grant date. All of the Company’s stock-based compensation is accounted for as an equity instrument. See Note 10 in the Company’s Annual Report on Form 10-K for fiscal 20182019 filed on August 28, 20182019 for further information regarding the 2016 Equity Incentive Plan and the Amended and Restated 2006 ESPP.

    The following table summarizes the stock-based compensation expense for the three and ninesix months ended February 28,November 30, 2019 and 2018 (in thousands):